Alibaba Group Holding (BABA, Financial) had a stellar IPO with the stock surging by 38% to $93.89. When the markets closed for trading on Friday, Alibaba commanded a market capitalization of $231 billion. The company’s market capitalization is currently higher than the market capitalization of Amazon (AMZN, Financial) and eBay (EBAY, Financial) combined. After a big IPO launch, this article discusses if Alibaba is a good stock to buy at these levels.
Alibaba is the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013. The chart below presents some of the key facts related to Alibaba and its scale.
Therefore, as of December 31, 2013, Alibaba had a combined GMV of US$248 billion from 231 million active buyers and 8 million active sellers. While this seems big, the impending growth potential in China is still huge.
China is the most populous country in the world with strong income growth coupled with strong increase in internet presence and online shopping. The strong growth in China’s market is evident from the fact that the active buyers in Alibaba surged from 133 million in June 2012 to 231 million by December 2013. Therefore, even in a relatively slow economic growth trend, China’s e-commerce market is booming. This provides big long-term opportunity for Alibaba.
Talking of the growth potential in China, the country’s real consumption in 2013 was 36.5% of total GDP and this is significantly lower as compared to the United States where consumption penetration rate was 66.8% in 2013. As China tries to create a better balance between consumption and production, the growth potential for players like Alibaba is immense just as it has been for eBay in the United States and in other parts of the world.
According to iResearch, online shopping, which represents 7.9% of total China consumption, is projected to grow at a compound annual growth rate, or CAGR, of 27.2% from 2013 to 2016.
China, with a population of 1.35 billion, had 618 million internet users as of December 2013. Further, the number of internet shoppers in China was only 302 million and this means that the internet shoppers can potentially double if all internet users become shoppers at some point of time. Another big potential comes from China’s mobile internet users, which stands at 500 million as of December 2013.
All these data suggest that there is big upside in the consumer market and the e-commerce market in China and Alibaba is certainly well positioned to capitalize on this big potential. The company has sufficient financial flexibility to embark on bigger growth plans over the next few years. Considering this factor, I am bullish on Alibaba.
In terms of revenue and EBITDA, Alibaba recorded revenue of $5.6 billion and an EBITDA of $2.7 billion for the year ended March 2013. The company also had a strong free cash flow of $3.1 billion for the year ended March 2013. Alibaba does have sound financials that add to the company’s positives other than the strong industry growth in China.
However, my only concern at this point is the valuation of the company and the valuation of the U.S. markets in general. The U.S. markets seem to be overvalued and a correction is likely over the next 3-6 months. As such, Alibaba can decline along with the broad markets. However, any decline in the stock price will be a good long-term buy opportunity as the impending growth for Alibaba is significant.
From an investment perspective, I will not rush into buying Alibaba in big quantity at this point of time. I will rather accumulate the stock gradually and add to my position on any meaningful correction.
